COUNTRYPROGRESSREPORT

ADDENDUM TO SBN GLOBALPROGRESS REPORT

SUSTAINABLE BANKING NETWORK (SBN)

NIGERIA

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1. Introduction ………………..………………….………………………….1

2. Executive Summary ..…………………..………………………..…...3

3. Enabling Environment ………..………………………..…….……….5

4. Environmental and Social Risk Management ..……….…….7

5. Green Finance Flows ………….……………………………………….9

Table of Contents

1 . I n t r o d u c t i o n

Market-based sustainable finance initiatives led by members of the Sustainable Banking

Network (SBN) have made sign ificant progress in directing the financial sector toward

sustainability. Established with International Finance Corporation’s (IFC) support in 2012, SBN

represents a community of financial sector regulators and banking associations from 34 emerging

markets. SBN members now represent over US$42.6 trillion in banking assets, accounting for more

than 85 percent of the total banking assets in emerging markets.

The SBN Global Progress Report is based on a unique measurement framework, the first of its

kind to assess sustainable f inance initiatives across emerg ing markets. The SBN Global Progress

Report for the first time presents a systematic view of progress on sustainable finance among

emerging economies that are represented by SBN. A rigorous measurement framework was

developed and agreed on by members. The SBN Measurement Framework draws on international

best practice as well as SBN members’ experiences and innovations. This framework will be

continuously applied to measure progress annually.

I N T R O D U C T I O N 1

The Global Progress Report draws on the findings of 15 individual country progress reports prepared for members,including this report. These 15 countries, with US$38.3 trillion in banking assets, account for more than 76 percent ofemergingmarket banking assets.

Country-specific progress reports were prepared for 15 SBN members with sustainable finance initiatives.These reports contain a thorough analysis of the country’s policy or principles in relation to the environmental andsocial (E&S) risk management and to the green finance flows, as well as a contextual analysis of the local policylandscape and the enabling environment. Country reports detail each country’s good practice and highlight areas offocus in order to support and encouragemembers to further accelerate sustainable finance.

All SBN member countries are advancing sustainable finance at differing stages of development.Countries are mapped to five different stages of their development, from initiating to mature.

SBN Progression Matrix with Assessment Results, based on progress up to and as ofJune 2017

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Country shows commitment to

develop sustainable finance initiatives

and policy s ignals

Country has developed a sustainable finance

pol icy/principle and has begun creating an

implementation plan

Country has begun to implement the

sustainable finance

pol icy/principle

Country has effectively

implemented the pol icy/principle and has begun reporting

on impacts

Country has induced a comprehensive

change in behaviors and mindsets toward sustainable finance

Nigeria is one of the most developed economies in sub-Saharan Africa and its financial sector isquite structured. Nigeria’s sustainable banking journey began in 2011. After a year of planning,the Nigerian Sustainable Banking Principles (NSBP, or the Principles), endorsed by theBankers’ Committee of the Central Bank of Nigeria (CBN), were released in 2012. ThePrinciples and related documents are quite comprehensive in their coverage of E&S riskmanagement aspects. 34 national and international banks, including 26 Deposit Money Banks(DMBs), have signed the NSBP and are committed to applying these principles. Banks are alsofollowing dedicated guidance notes and sector guidelines, which are based on internationalstandards and good practice. The CBN directs and supports the adoption and implementation ofthese principles and guidelines. To that end, the regulator requires financial institutions (FIs) tosubmit biannual reports in a consistent manner.

With regard to the Green Finance Flows aspect, the Nigerian principles andguidelines encourage green investment, but have yet to provide sufficient guidance and toolsfor implementation. However, Nigeria is making progress and plans to release a green bondshortly. 1

The NSBP, which currently only applies to banks, is in the process of being applied to otherareas of the financial sector, such as insurance, capital markets and pension funds.

Overall Results

2 . E x e c u t i v e S u m m a r y

Nigeria

E X E C U T IVE S U MM A RY 3

1 Nigeria issued a 10.96 billion Naira Sovereign Green Bond in December 2017, after the cut off date of June 2017for the report.

Good Practice

- The endorsement of NSBP by the Central Bank of Nigeria ensures astrong level of involvement fromFIs.

- The Principles, accompanied by methodological notes and specificsector guidelines (oil & gas, power and agriculture), provide FIs withadequate and detailed guidance and tools, in order for them to buildtheir own E&S policies.

- Committed FIs are required to report and disclose their E&S policiesand performance on a biannual basis.

- The financial markets are involved in the promotion of sustainabilitypractices (e.g. through the Corporate Governance Rating System, andthrough the Nigerian Stock Exchange’s membership of the SSEInitiative).

Areas for Improvement

- The Principles could be enhanced to integrate guidelines, definitionsandmethodological notes to promote green financing.

- Nigeria could further encourage green financial flows by providingfinancial or non-financial incentives.

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Country ProfileNigeria is Africa’s second largest economy. It is also one of Africa’s biggest oil producers, andone of its largest recipients of foreign direct investment. Nigeria’smain economic sector is oil &

gas, which accounts for approximately 35% of the country’s GDP. Agriculture also plays a keyrole in the Nigerian economy. This results in many environmental and social issues, such asecosystem damage, climate change impacts, water pollution and scarcity, which have an impacton the health and safety of local communities. The country is also facing social unrest, primarilydue to corruption and poverty (70% of the population is currently below the poverty line).

The Nigerian government is striving to tackle these issues. In particular, it is making enhancedefforts to help Nigeria transition to a lower carbon economy and society. In 2013, Nigeria’sFederal Executive Council approved and adopted a National Policy on Climate Change. Thispolicy aims to frame the country’s economic and social response to climate change. Nigeria alsoratified the Paris Agreement in May 2017.

Nigeria's financial sector has experienced significant change in recent years. The banking sectorhas undertaken a major consolidation, which has reduced the number of banks and increasedbank capitalization. Nigerian capital markets are not fully developed, but with two stockexchanges and around 200 listed companies, they are increasingly active.

3 . E n a b l i n g E nv i r o n m e n t

C O N T E X T:

E N A B L IN G E N VIR ON ME NT 5

Support from RegulatorsThe Central Bank of Nigeria (CBN) monitors the implementation of the Principles by overseeingthe adoption and implementation of the Principles. CBN also supports FIs for theirimplementation. A coordinating committee, comprised of CBN and the E&S champions of all thebanks, is themain platform for coordination and collaboration.

Through FI’s biannual reports, CBN tracks the level of implementation of the NSBP. However,these results have not yet been made public. In 2015, CBN trained 99 staff members inenvironmental and social risk assessment. In addition, environmental and social riskassessments were conducted in nine Nigerian states, where CBN had some interventionprojects, in order to ensure compliance with the Principles.

Background and Strategy of the Sustainable Banking FrameworkIn 2003, the Securities and Exchange Commission (SEC) released a Code of CorporateGovernance (the Code, updated in 2008) with the aim of enhancing transparency,accountability and corporate governance among companies operating in Nigeria. The Codedefines good practice regarding: the board of directors (e.g. responsibilities, duties,membership, remuneration), the company’s relationship with its shareholders, the company’srelationship with other stakeholders regarding sustainability issues, risk management andaudit processes, accountability and reporting, and communications issued by the company andthe company’s code of ethics.

Nigeria’s sustainable banking framework was founded by the Central Bank of Nigeria (CBN)

and its Bankers’ Committee a few years after the release of the SEC’s Code of CorporateGovernance. CBN issued the Nigerian Sustainable Banking Principles (NSBP) in 2012, aswell as implementation guidelines, which were approved by the Bankers’ Committee. The NSBPcontains the following nine principles:

1. E&S Risk Management2. E&S Footprint3. Human Rights4. Women’sEconomic Empowerment5. Financial Inclusion6. E&S Governance7. Capacity Building8. Collaborative Partnerships9. Reporting

CBN requires FIs to report their performance against these principles twice a year, usingconsistent reporting template (2014). In addition to the Principles, guidelines for engagingpriority sectors have been developed for oil & gas, power and agriculture. To date, 26 DMBsand a number of foreign banks have signed the Principles and committed to applying them. ThePrinciples and guidelines are currently being reviewed, to ensure compliance with currentGlobal Reporting Initiative (GRI) requirements. CBN intends to create a dedicated NSBPSecretariat in the near future.

The NSBP serves as an inspiration for the entire Nigerian financial industry: Nigeria’s FinancialServices Regulation Coordinating Committee (FSRCC), which includes the CBN, Nigeria DepositInsurance Corporation (NDIC), Securities and Exchange Commission (SEC), National InsuranceCommission (NAICOM), Corporate Affairs Commission (CAC), Federal Ministry of Finance

(FMF), Nigerian Stock Exchange (NSE), Nigeria Commodity Exchange (NCX), the Federal InlandRevenue Service (FIRS) and the National Pension Commission (PenCom), has launched aNational Sustainable Finance Roadmap. This Roadmap requires each member of the FSRCCto develop and implement operational, sector focused strategies, based on the NSBP, prior toDecember 2019. Some of these actors have already started their own sustainable finance

journey. A Sustainable Finance Subcommittee for Capital Markets was launched in September2017,under the chairmanship of CBN and IFC.

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The Nigerian banking sector is concentrated around five major commercial banks, most ofwhich are international banks. All of Nigeria’s major banks, as well as dozens of other banks,are committed to adopting the NSBP and are actively working on implementation, with thesupport of CBN. The current framework in Nigeria (NSBP and related guidelines) demonstratesa high level of detail and maturity among SBN members in terms of E&S risk management,

including a comprehensive set of requirements covering the building and maintenance of E&Scapacity, periodic portfolio reviews, stakeholder relationships and reporting obligations.

In terms of reporting, Nigeria’s framework is among most advanced SBN members. CBN firstrequired banks to release one-off reports every quarter in 2014. To formulate an E&S policy,the requirements include to: establish appropriate governance structure, promote capacitybuilding, and draft procedures and processes. Since 2015, banks must report information twicea year that not only covers the nine principles, but also the sector guidelines. The main area forimprovement is that the framework does not currently include climate risk managementand/or a climate strategy in its guidelines. Also, the applicable scope of the operativeframework is limited to banks. The NSBP could be expanded to include other financingactivities, a process which has already begun via the FSRCC’s National Sustainable FinanceRoadmap.

The Nigerian banking sector has an relatively good foundation with regard to sustainability andgood international industry practices: nine financial intermediaries have signed the UN GlobalCompact and two FIs have recently adopted the Equator Principles.

4 . E nv i r o n m e n t a l a n d

S o c i a l R i s k M a n a g e m e n t

R I S K :

E N V I R O NM EN TA L A N D S O CIA L R IS K M A NA GE ME NT 7

Policy (/15)

Reporting (/15)

Capacities (/25)

Monitoring (/20)

Appraisal (/25)

SBN average Africa Nigeria

Subpillars Comments on good practice and areas for improvement

Policy

- The Principles require the formalization of an environmental, social andgovernance (ESG) policy, making reference to good international industrypractice and providing FIs with 3 additional sector guidelines for the mostsensitive sectors (oil & gas, power and agriculture).

- The scope of work is clearly stated: the Principles applies to banks, discounthouses and development finance institutions.

- Going forward, banks could be required to formalize a climate riskmanagement policy or develop a climate strategy aligned with Nigeria’sclimate commitment.

Capacities

- The Principles require FIs to define clear E&S governance structures, todetermine roles and responsibilities and to ensure resources and capacity areadequate,especially through the development of dedicated training sessions.

Appraisal- Banks are required to screen and categorize projects and, if needed, to includeconditions and covenants in transaction documents.

Monitoring

- At the project level, the Principles require FIs to develop processes andprocedures to manage ESG risks during supervision. This includes thedevelopment of customized E&S due diligence procedures, client E&Sperformancemonitoring and review of E&S conditions.

- The process could be strengthened by including climate risk in portfolioreviews.

Reporting

- The Principles is one of the most advanced among SBN members in terms ofreporting and disclosure, requiring the reporting of relevant performanceindicators and associated targets, and the disclosure of annual E&S reports.

- The Principles could require FIs to put in place a public grievance mechanism

for stakeholders to express potential concerns over the projects that the FIsare financing.

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5 . G r e e n F i n a n c e F l o w s

The Principles invite Banks to “develop processes to identify and invest in business opportunities,clients or sectors that promote the use of advanced E&S risk management practices, newtechnologies, low carbon activities, entrepreneurial SMEs, etc. in line with extant banking lawsand which aim to achieve a positive impact”. Nevertheless, the Principles do not setrequirements or standards regarding the development of green finance flows.

In 2013, the Nigerian government launched the National Policy on Climate Change, the mainobjective of which is to implement “measures that will promote low carbon as well as sustainableand high economic growth”. Although the Policy does not specifically mention green financeflows, Nigeria faces vast investment needs for the transition to a sustainable, low-carbon andclimate resilient economy. The government has made it clear that private sources of finance areneeded. Nigeria issued a 10.96 billion Naira Sovereign Green Bonds (the first in Africa) inDecember 2017 to increase capital flows for climate finance.

In addition to the national decision to promote and support green finance, the financial markethas been proactive in terms of corporate governance promotion: in 2013, the Nigerian StockExchange (NSE) and Nigeria’s Convention on Business Integrity (CBI) launched a CorporateGovernance Rating System (CGRS). This system ranks NSE-listed companies based on theircorporate governance practices and anti-corruption policies. While the pilot phase in 2014 wasvoluntary (three companies underwent the rating), participation in CGRS in 2015 becamemandatory for all companies listed on the Premium Board at the NSE.

Within the banking sector a number of excellent voluntary sustainable finance initiatives haveemerged, with some major Nigerian banks receiving sustainability awards (Fidelity Bank wonthe Karlsruhe Green Era Award in 2014, and Access Bank won the Sustainable Finance Awardin 2016).

O P P O R T U N I T Y:

G R E E N F I NA NCE F L O WS 9

Initiatives (/35)

Reporting (/20)

Definitions (/25)

Analytics (/20)

SBN average Africa Nigeria

Subpillars Comments on good practice and areas for improvement

Initiatives

- There are policy-led (see National Policy on Climate Change) as well asmarket-led (see CGRS and Green Awards) initiatives in place to mobilize greenfinancing flows and encourage innovation.

- The NSBP mentions that “a bank may decide to offer preferential financingconditions (e.g. rates, maturity, grace period, eligibility criteria, etc.) forprofitable clients or investments that demonstrate strong E&S performance”.However, there lacks of comprehensive financial incentives that could fostergreen finance in Nigeria.

Definitions- The Principles could be strengthened to provide guidance or requirements interms of defining green finance and green assets.

Analytics

- Banks are required to report information about their own environmental andsocial footprint, as well as that of their borrowers and service providers.However, there are currently no requirements in terms of environmentalbenefit calculation and the monitoring of investments at project and assetlevel.

Reporting

- There are currently no requirements in terms of green finance flows reportingand disclosure. Guidelines encouraging reporting and disclosure regardingbanks’ green finance performance could positively impact the development ofgreen financing flows.

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